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Jun
27

Is the New Federal Tax Law a Boon for Residential Rentals?

The federal government has long encouraged owning a home over renting. Housing subsidies in the tax code effectively lower the after-tax cost of homeownership, which has helped taxpayers move out of residential rentals and into their own homes. The Jeffersons might not have credited tax policy for it in their 1970's sitcom, but it has assisted taxpayers in "moving up" to bigger and better homes. The Tax Cuts and Jobs Act of 2017 (TCJA) makes sweeping changes to the tax code for individual taxpayers that directly impact their ability to transition from renting to owning their home.

About 34 million households, or 44 percent of U.S. homes, carry a mortgage with annual interest charges that exceeded the prior standard deduction. With the new standard deduction, that group shrinks to around 14 million, or 15 percent of U.S. households, according to the National Association of Realtors (NAR).

And while the TCJA nearly doubles the standard deduction, it caps the deduction for state and local taxes -- including income, sales, and property taxes -- at $10,000 for both single and married taxpayers. This one-two punch could significantly impair some taxpayers' appetite for homeownership.

Two household examples

NAR prepared an analysis that illustrates this potential impact. In the first of two examples, a single taxpayer earns $58,000 per year, rents an apartment, and claims the standard deduction. Her tax liability for 2018 under the prior law would have been $7,491 but, under the TCJA, she pays just $6,060 and enjoys a tax cut in the amount of $1,431.

Now assume she purchases a home for $205,000, putting down 3.5 percent with a 30-year mortgage fixed at 4 percent interest. Further assume her first-year mortgage interest would total $7,856 and she would pay property taxes of $2,050.

As a first-time homeowner, her tax liability under the prior law would be $5,393. The tax benefits under the prior law save $2,098, which effectively lowers her monthly mortgage payment by $175 per month. Under the TCJA, her tax would be $5,423 (a $30 increase!) and the differential between renting and owning a home, which was $2,098 under the prior law, has shrunk to just $637 or $53 per month.

In the second NAR example, a married couple with three children and an annual household income of $120,000 leases a home and takes the standard deduction. Their tax liability for 2018 under the prior law would have been $11,370 but, under the TCJA, they pay $8,999 and enjoy a tax cut in the amount of $2,371.

Now assume they purchase a home for $425,000, putting down 10 percent with a 30-year, fixed rate mortgage at 4 percent interest. Further assume their first-year mortgage interest would total $15,189 and they would pay property taxes of $4,250.

Under the prior law, the couple would lower their tax liability for 2018 by $3,219 by purchasing a home instead of renting. This amount effectively lowers their monthly mortgage payment by over $268 per month. Under the TCJA, their tax would be $8,051 (a $100 decrease) and the differential between renting and owning a home, which was $3,219 under the prior law, has shrunk to just $948 or $79 per month. (For NAR's analysis and further discussion of Apartment Lists' examples, visit https://www.nar.realtor/tax-reform/the-tax-cuts-and-jobs-act-what-it-means-for-homeowners-and-real-estate-professionals.)

As these examples illustrate, the TCJA offers an incentive to homeownership, but it is considerably less valuable than the previous incentive. Thiseffectively levels the playing field between renting and owning a residence. In fact, after accounting for additional costs associated with homeownership such as maintenance, neighborhood association dues and local district fees, the scales may now tip in favor of renting.

Thus, taxpayers may forego the traditional path, and choose not to move up from renting to purchasing a home. Instead, they may choose to climb within the rental market. That is, they may move to bigger and better residences and may spend more on their residences , but they are likely to rent rather than buy.

At the same time, the TCJA is fueling investors' interest in the rental market so that more options will likely be available for taxpayers who forego owning a home in favor of renting. To that end, the TCJA offers more favorable treatment of pass-through income. And, income property owners are still able to deduct interest payments on mortgages, with no cap.

These factors make it more profitable for investors to own income-generating property such as multifamily apartments or single family rentals. So, while the TCJA may increase taxpayer demand for renting homes, it also encourages investors to invest in residential properties and make bigger and better rental units available to renters. Whether by accident or design, the TCJA is likely to result in significant benefits to the rental market.

Angela Adolph is a partner in the law firm of Kean Miller LLP, the Louisiana member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
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Sep
25

Louisiana: Tax Exemption For Partially Completed Construction?

Passage of a new ballot initiative will confirm exemption of partially completed property from taxation."

Any taxpayer planning to develop a new property must consider how local taxing entities will treat the project during construction, but the question is especially important in evaluating and comparing overall costs of potential development locations during an industrial site search.

States generally recognize Construction Work in Progress (CWIP) as property that is in the process of changing from one state to another, such as the conversion of machinery, construction materials and other personal property from inventory into an asset or fixture by installation, assembly or construction. There is no clear consensus among taxing jurisdictions as to whether (or how) a tax assessor should value such par­tially completed construction on the applicable assessment date.

Many states including Alabama, Missouri and North Carolina value CWIP based on the value or percentage of completion on the assessment date. Kansas values incomplete construction based on the cost incurred as of the assessment date. Florida, Maryland, Virginia and West Virginia assess CWIP when the work has progressed to a degree that it is useful for its eventual purpose. And in South Carolina, improvements are only assessed upon completion.

With the exception of a few errant assessments in the early 1930s, Louisiana has never assessed partially completed construction for property tax purposes. Rather, taxing jurisdictions assess and add the completed property to tax rolls as of January 1 of the year immediately following completion of construction. This complements Louisiana's industrial tax exemption program, which exempts certain manufacturing property from ad valorem taxation for a specified number of years.

Unfortunately, properties on which ad valorem taxes have been paid are ineligible for participation in the exemption program. Thus, if a taxpayer has paid taxes on a project as partially completed construction, the property is no longer eligible for the industrial tax exemption and remains on the taxable rolls, subject to assessment each year. Obviously, assessing projects with partially finished construction in this manner would significantly diminish the value of the exemption pro­gram to taxpayers and undermine its usefulness to economic develop­ment agencies as an incentive tool.

In 2016, a local assessor broke with established practice and initiated an audit that included construction work in progress on a major industrial taxpayer. This audit raised statewide and local uniformity concerns over the assessment of a single taxpayer's partially completed construction in a single parish, and jeopardized the taxpayer's existing industrial tax exemption.

The taxpayer immediately filed an injunction action in district court, and the Louisiana Legislature took up the situation during its regular 2017 legislative session. Recognizing the need to formalize the exemption, the Legislature referred to voters a constitutional amendment that would codify the exemption of construction work in progress from assessment. Louisiana is one of 16 states that require a two-thirds supermajority in each chamber of the Legislature to refer a constitutional amendment to the ballot, so their vote underscores the strong support among lawmakers to codify the exemption.

Act 428 would add a subsection to Article VII, Section 21 of the Louisiana Constitution, which lists property that is exempt from ad valorem tax assessment. The new provision would exempt from ad valorem tax all property delivered to a construction project site for the purpose of incorporating the property into any tract of land, building or other construction as a component part. This exemption would apply until the construction project is completed (i.e. occupied and used for its in­tended purpose).

The exemption would not apply to (1) any portion of a construction project that is complete, available for its intended use, or operational on the date that property is assessed; (2) for projects constructed in two or more distinct phases, any phase of the construction project that is complete, available for its intended use or operational on the date the property is assessed; (3) certain public service property.

If voters approve the ballot item, CWIP will be exempt from property taxes until construction is "completed." The proposed amendment defines a completed construction as occurring when the property "can be used or occupied for its intended purpose." The exemption would thus remain effective until the construction project or given construc­tion phases of the project are ready to be used or occupied.

A constitutional amendment does not require action by the Governor. This constitutional amendment will be placed on the ballot at the state­wide election to be held on Oct. 14, 2017.

Angela Adolph is a partner in the law firm of Kean Miller LLP, the Louisiana member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
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Oct
30

Undermining A Public Purpose

"Economic development tools are under assult in Louisiana by tax assessors"

Louisiana tax assessors have begun assessing taxes on properties that have been exempt from property tax under economic development incentive programs, undermining one of the state's essential tools for promoting job growth and commerce.

Louisiana offers a handful of enticements to attract new business and spur economic development, including the industrial property tax exemption, inventory tax credits, payments in lieu of taxes (PILOTs) and cooperative endeavor agreements (CEAs) with private companies. Each of these incentives involves reducing a private entity's property tax liability.

Article 7, Section 14 of the Louisiana Constitution authorizes the state and its political subdivisions to enter into cooperative endeavor agreements that serve a public purpose, and Section 21 of the same article provides that public lands and other public property used for public purposes are exempt from property tax. The Louisiana Supreme Court has also recognized that economic development is a public purpose.

Under a typical cooperative endeavor agreement, a political subdivision leases industrial property to a private entity for development and operation. Since a political subdivision owns the property, it is exempt from property taxes. Unfortunately, some assessing authorities have decided otherwise, and have attempted to collect property tax in connection with these assets.

In Pine Prairie Energy Center LLC vs. Soileau, in 2014, a local industrial development board issued bonds and loaned the proceeds to privately held Pine Prairie to build an underground natural gas storage facility and associated facilities and pipelines. Prior to entering into the transactions, the industrial development board, Pine Prairie, and even the local tax assessor all agreed that, as long as Pine Prairie paid the agreed-upon lease payments and payments in lieu of taxes, the property would be exempt from property taxes during the lease period.

Pine Prairie built the facility, sold it to the industrial development board and then leased the property back for operations. The assessor subsequently listed the property on the tax rolls as Pine Prairie's property. Pine Prairie paid the taxes under protest and sued for a refw1d and declaratory judgment that it did not owe property taxes on an asset owned by the industrial development board.

The assessor contended that the property was not being used for a public purpose. The Third Circuit Court of Appeal noted that actual public use was not the criteria by which public purpose was determined. Rather, public use is synonymous with public benefit, public utility or public advantage, and involves using the natural resources and advantages of a locality to extract their full development in view of the general welfare.

Considering that Pine Prairie's investment resulted in approximately $700 million in local economic value, the court held that the project was beneficial to the public and thus the property was indeed being used for a public purpose.

In Board of Commissioner of Port of New Orleans vs. City of New Orleans, the Port of New Orleans leased property to two private entities that provide warehousing, freight forwarding and intermodal transportation services at the port. As i n Pine Prairie, the assessor assessed property taxes on the private companies that leased the properties, not on the public entity that owned them. When the companies failed to pay the taxes, the assessor attempted to sell the leased properties at a public tax sale.

The assessor argued that, because the activities of the private companies did not qualify as a public purpose as they did not constitute a governmental function, a benefit to the general public or a dedication for use by the general public, the property was not being used for a public purpose. The port authority demonstrated that the companies' activities were necessary for the operation of a port facility and that they furthered its broad public mission to maintain, develop and promote commerce and traffic at the port. The Fourth Circuit Court of Appeal punted on the question in 2014, and ordered a hearing on whether the specific activities conducted by the companies served a public purpose. That case is ongoing.

Cases like these obviously erode business confidence in the reliability of tax incentives. Although Pine Prairie won its case, it had to pay some $122,000 in taxes under protest and then sue to recover its funds. And the Port of New Orleans had its property seized and offered at tax sale, and now has to prove up that traditional port activities like warehousing, freight forwarding and intermodal transportation services, which have always been necessary to the operation of a port facility, serve a public purpose. This kind of uncertainty is devastating to economic development efforts.

Adolph Angela

Angela Adolph is a partner in the law firm of Kean Miller LLP, the Louisiana member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jan
01

Louisiana Property Tax Updates

Updated september 2019

But It's A Nice Round Number...

For the 2017 Tax Year, the Taxpayer protested a gross over-valuation of its casino/hotel property by the Assessor for Bossier Parish (the “Assessor”). The dispute concerns both the casino/hotel property and the land valuations (land underlying the casino/hotel, the RV parking lot and the employee parking lot). After a full trial on the merits, the five-member state commission charged with overseeing the correctness of property tax assessments – the Louisiana Tax Commission (“LTC”) – rendered a decision that in large part corrected the injustice and numerous errors contained in the Assessor’s overvaluation and consequent unfair assessment regarding both the casino/hotel property and the land valuation.

The Commission determined that both the Taxpayer’s appraisal and its Staff appraisal were flawed for different reasons, but also determined that sufficient information was submitted enabling the Commission to reconcile the issues in each of the appraisals and calculate a new, correct income approach to value.  In its decision, the Commission actually offered values of the casino/hotel property using both the cost approach and the income approach, ultimately concluding that the income approach was the more reliable method for valuing the casino/hotel income-producing property.  

The Commission’s Decision also determined that both the Assessor’s and Staff appraiser’s land valuations were unreliable, and further determined that “The Taxpayer’s land appraisal is the most reliable information and evidence provided regarding the land value.” Accordingly, the Commission determined the total land value to be the same as the Taxpayer’s local land appraisal expert.

The Assessor appealed the LTC decision to the District Court which affirmed the LTC’s finding of 65% obsolescence (using the cost approach method) based upon the record evidence of obsolescence – none of which was refuted by the Assessor.  The District Court was however silent on the land valuation issue. The Assessor appealed the District Court decision to the Second Circuit Court of Appeal.

The Second Circuit Court of Appeal ordered that the LTC adopt the appraisal report of the LTC staff appraiser in which the cost approach was used to value the subject property. Interestingly, both parties (Taxpayer and Assessor) and the LTC refuted the staff appraisal report during the LTC hearing on the matter, and neither the parties, nor the LTC requested that the appraisal report be adopted on appeal to the District Court or the Second Circuit Court.

The Second Circuit found that the Assessor “arbitrarily refused to consider additional obsolescence in his 2017 assessment, which was an abuse of the Assessor's discretion,” and as a result, his 2017 assessment was incorrect.  However, the Court also determined that the LTC “arbitrarily and capriciously assigned an obsolescence factor [65%], which was in error.” The Court then fashioned a remedy that requires the LTC to adopt the appraisal of a staff employee that uses a 30% obsolescence factor that is not supported by anything other than that employee’s belief that it would yield a “nice round number.”  Additionally, the staff appraisal report referenced by the Second Circuit included the casino/hotel property, but included only part of the land – the land on which the casino/hotel sits –and did not include the other two parcels of land.  Thus, the Second Circuit was silent on the valuation of two of the land parcels.

The Court’s decision fails to address the record presented by the taxpayer – most importantly the opinion of the taxpayer’s expert, and the factual back-up he provides for those opinions.  The expert opinions of the only qualified expert appraiser to testify were not even mentioned in the decision, indicating that evaluation of the record in its entirety did not occur. The decision mentions the expert appraiser once, but does not discuss his analysis or the substance of his opinions at all. The decision also does not recite his qualifications, credentials, or professional associations and experience. The decision is also devoid of any discussion or any of the evidence presented by the taxpayer’s other witnesses – including the General Manager of the casino/hotel - on which the LTC’s decision was clearly based.

Both the Assessor and the Taxpayer have filed applications for re-hearing to the Second Circuit.  Bobby Edmiston, Assessor v. Louisiana Riverboat Gaming Partnership d/b/a Diamond Jacks Casino and Resort, No. 52, 948 (La. App. 2 Cir. 9/9/2019

Angela W. Adolph
Kean Miller LLP
American Property Tax Counsel (APTC)

 

Property Tax Exemption

The operator of lease-to-own stores claimed an exemption from Orleans Parish ad valorem taxes on the grounds that the leased personal property was being used in the homes of its customers. However, the Fourth Circuit found that the applicable ad valorem tax exemption applies to owners using their property in their own homes as opposed to a commercial owner leasing out personal property to customers for use in their homes. Aaron's, Inc. v. Foster, No. 2019-CA-0443 (La. App. 4 Cir. 09/25/2019).

Angela. W. Adolph
Kean Miller LLP
American Property Tax Counsel (APTC)

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